Discussion Archives:S Corporation - Take profit through distribution or loss through salary?

I am the sole owner of an S Corp where I am contracted out to a single client on a 40hr/week job. So essentially I am an employee for the client but paid business to business. I have minimal expenses (gas, small office supplies, CPA, etc).

I would like to use the 60/40 rule to pay myself a reasonable salary and then take the rest in profit distributions. My CPA says I should take all income as salary so that he can create a loss for the business and get it back on my refund.

Which is better in the long run? Thanks.

One more question though... do I actually receive the distribution payment or does it stay on the business side as equity which gets claimed on my personal tax return through a K-1? I thought I could cut myself two checks every month: one as salary and one as a profit distribution. My CPA states that I would never actually see the money unless I took it through a dividend payment which would get taxed at 28% so it's not beneficial.

Your S Corp profit (income after your expenses and salary) is taxed to you at your personal tax rate. It doesn't matter how much of a distribution you take. It's a distribution not a dividend. If your salary is reasonable, then you can take a distribution and save yourself payroll taxes.

It is a good idea to check the two checks.

- Rick

There b/e a pension plan set up. I believe it would have had to be set up by 12/31/06. But start one for 2007.

If there is any accumulated earnings, you can take that as a distribution. It would be tax free since you pay the tax on your 1040.

I am new to this forum.

I have a question regarding the tax on the s corp profit. I am the s corp owner and the only employee. I wrote myself a check with $10000 in september, and it's intended as a profit, not my salary ( I paid my salary as usual). Please tell me what tax should I pay? based on what I read here, I should withhold the personal income tax, not social security and medical tax, am I right?

I I withhold the personal income tax, how should I report to IRS, and when?

Many thanks,

blowfish

You don't need to withhold PIT on the 10k you took as a distribution. You may need to make estimated tax payments each quarter to avoid the underpayment penelty on your individual return.

You should of course be withholding PIT and FICA on your salary and make the appropriate deposits.

Certainly taking a salary depends on the amount of business the s corp. I took over a client who had taken a minimal salary where the s corp made money. I suggested that he increase his salary at least to the ss max. I couldn't convince him to start a pension plan because there were several employees. He decided to put money into an IRA for himself and his wife, personally, not through the business. He decided to retire at age 62 and was able to get a sizable ss check even though it was discounted.

He was still able to get his distributions.

Thank you in advance from Miami, FL.

Don't forget some of us MD guys are out here too!

Hey Kevin, maybe Blrg helped those guys in NYC recently wheel their dead buddy to the store so they could cash his Social Security check.

http://www.msnbc.msn.com/id/22590332/

Tom

Do I pay tax? and if so, at what rate and how do I offset the taxes, I really don't have anymore deductions...

I would appreciate any help that you can give.

Thanks Lisa

When or whether you pay tax on funds distributed from your business, other than your salary, depends on how the business is organized. If it is a Subchapter S corporation, you can withdraw funds from the business without tax consequence to the extent that you and your co-owners have already paid tax on that income, i.e., it flowed through from the S corporation to your individual income tax returns. Such distributions must be in proportion to your and your co-owners' interests in the corporation; otherwise you may terminate the Subchapter S election.

I'd suggest you ask your accountant to explain how the kind of entity your business is conducted by is treated for income tax purposes. I wouldn't ask for that until after April 15, though, if I were you <G>. Any distributions you take now will not affect your taxes, if at all, until 2008.

You should also really be asking your accountant this question. That's why you are paying them.

But in the spirit of being nice, because I notice some people today are being crappy, the short answer to your question is no.

Tom

Tom

Lisa

I am an individual business owner. I incorporated my business in November of 2008, on the advice of an accounting firm, to save self-employment tax, as my business income has gone up about 25% in the last year. It is now February of 2009. I have been talking to the tax adviser who wants to set me up on monthly withholding of State and Fed taxes. Being a corporation, I am now expected to pay a pretty substantial payroll tax every month, in addition to distributing these monthly withholding amounts (is this really necessary"?). Maybe it's just me, but it seems to me that, with the increase in accounting service fees and the payroll tax that I have to pay, as well as being told that my corporation has to match all of my tax payments, I am not sure that the savings of the S Corp is going to offset the payroll tax, accountant's fees, etc., etc. Life has been so easy for me as a sole proprietor - make some big purchases at the end of each year, write my taxes down to a point where even the higher percentages of the written down amount is doable, with sooooo much less hassle! Is it possible that you can accomplish the same thing as the S-Corp avoiding self-employment taxes by just buying big ticket write-offs and reducing your total taxable income so that the increased percentage of the reduced taxable income is a wash? I hate all of the intrusion into my business and complication that the Corporation tag creates. Any thoughts?

This is just a small part of the big picture, but it should get you started on what to do your research on. Your accountant should know your situation better than we do though, so ask him what he's going to save you in taxes vs the extra costs. When I consult with clients about entity selection or changes, I lay it all out as far as what to expect. If incorporating or being an LLC taxed as an S Corp is going to save them some money, they'll usually do it.

This is just a small part of the big picture, but it should get you started on what to do your research on. Your accountant should know your situation better than we do though, so ask him what he's going to save you in taxes vs the extra costs. When I consult with clients about entity selection or changes, I lay it all out as far as what to expect. If incorporating or being an LLC taxed as an S Corp is going to save them some money, they'll usually do it.